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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission file number 0-8773
CRESTED CORP.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0608126
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of August 15, 2000 computed by reference to the average of the
bid and asked prices for the Registrant's common stock as reported by National
Quotation Bureau on Pink Sheets for the week then ended, was approximately
$647,060.
Class Outstanding at August 26, 2000
- ------------------------------- ------------------------------
Common Stock, $0.001 par value 10,381,664 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the item numbers involved:
2000 Annual Meeting Proxy Statement for the fiscal year ended May 31,
2000, into Items 10-13 of Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
1
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium Mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp., Rocky Mountain Gas, Inc. and Sutter
Gold Mining Company (subsidiaries of Crested), are forward-looking statements.
In addition, when words like "expect," "anticipate" or "believe" are used,
Crested is making forward-looking statements.
Although Crested believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. Business and Properties
(a) General.
Crested Corp. ("Crested", "Registrant" or the "Company") and its parent
U.S. Energy Corp.("USE") d/b/a USECC are in the business of acquiring,
exploring, developing and selling or leasing mineral properties, and the mining
and marketing of minerals. Crested is now engaged in three principal mineral
sectors: uranium and gold, both of which are currently in the care and
maintenance mode, and coalbed methane gas. For information on "industry
segments" for accounting purposes, see (b) below. The most significant uranium
properties are located on Green Mountain and Sheep Mountain in Wyoming, and in
southeast Utah. USECC's gold operations are conducted through Sutter Gold Mining
Company ("SGMC"), a 63% USECC owned subsidiary. The coalbed methane gas sector
is conducted through Rocky Mountain Gas, Inc., a newly created, 82% owned,
subsidiary of Crested and USE.
Crested was incorporated in Colorado in 1970. All of its operations are in
the United States. Principal executive offices are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone (307)
856-9271.
Most of Crested's operations are conducted through a joint venture with
USE, which owns a majority of Crested's Common Stock, and various jointly owned
subsidiaries of USE and Crested. The joint venture with USE is referred to in
this Report as "USECC." USE and Crested are independent companies, with two
common board members (John L. Larsen and Max T. Evans). In 1980, USE and Crested
formed a joint venture to do business together (unless one or the other elected
not to pursue an individual project). As a result of USE funding certain of
Crested's obligations from time to time (due to Crested's lack of cash on hand),
and later payment of the debts by Crested issuing common stock to USE, Crested
became a majority owned subsidiary of USE in fiscal 1993. See Part III of this
Report.
Until September 11, 2000, USE and USECC, and Kennecott Uranium Company
("Kennecott"), owned the Green Mountain Mining Venture ("GMMV"), which holds a
large uranium deposit and uranium mill in Wyoming. The GMMV ceased mine
development operations in fiscal 1999 and its properties are in
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care and maintenance status due to the depressed market for uranium oxide. On
September 11, 2000, USE and Crested settled litigation with Kennecott including
the GMMV by selling all their interests in the GMMV and its properties back to
Kennecott for $3.25 million. Please see "Minerals-Uranium-The Green Mountain
Mining Project" below. Other principal uranium properties and an uranium mill in
southeast Utah are held by Plateau Resources Ltd., a wholly-owned USE
subsidiary. The Utah uranium properties are also in a care and maintenance
status. At some future date, if the uranium oxide market improves, the Company
and USE may consolidate their remaining uranium assets into a single subsidiary
and finance the startup of its mines and mill operations, subject to obtaining
the necessary debt or equity funding. There are no current plans to implement
this strategy at the present time.
The gold assets held by Sutter Gold Mining Company ("SGMC"), a
majority-owned subsidiary of USE and a minority owned subsidiary of Crested are
also in a care and maintenance status, with a minor amount of improvements being
made to the surface infrastructure in fiscal 2000, because the current price of
gold (less than $280/oz. in early August 2000) prevents raising the capital
necessary to put the properties into production. See "Gold" below.
In fiscal 2000, USECC provided contract drilling and related services
to companies that own and are developing coalbed methane ("CBM") wells in the
Powder River Basin of Wyoming and Montana and other basins in Wyoming. USECC
bought more drilling equipment for this purpose to meet the expanding market for
contract services. Numerous major oil and gas companies, utilities and gas
transmission companies have drilled and are producing a significant number of
CBM wells in Wyoming.
In addition, in fiscal 2000, USE and Crested formed Rocky Mountain Gas,
Inc. ("RMG"), a Wyoming corporation, to acquire properties with potential for
coalbed methane in the Powder River Basin of Wyoming and Montana, and other
basins in Wyoming, for development of coalbed methane gas wells for RMG's own
account.
At August 1, 2000, RMG held approximately 248,000 net mineral acres of coal
deposits under BLM, state and fee leases in Wyoming and Montana. Approximately
185,000 of these acres are held with Quantum Energy LLC in Montana. RMG intends
to drill and produce CBM gas wells on this acreage; the pace of development will
depend on permits being available from state and federal regulatory agencies,
and on sufficient capital being available to fund exploration and production
costs.
Construction operations have been carried on primarily through USE's
subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas operations (but not
methane gas) are carried out through Energx, Ltd., a subsidiary of USE and
Crested.
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(b) Financial information about industry segments.
The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) contract drilling and construction. The
Registrant engages in other miscellaneous activities such as oil and gas
exploration, development and production. The principal products of the operating
units within each of the reportable industry segments are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
----------------- -------------------------------
Minerals Sales and leases of
mineral-bearing properties and,
from time to time, the
production and/or marketing of
uranium, gold, molybdenum and
advance royalties on molybdenum
property.
Commercial Operations Operation of a motel
and rental of real estate,
operation of an aircraft fixed
base operation (aircraft fuel
sales, flight instruction and
aircraft maintenance), and
provision of various contract
services, including managerial
services for subsidiary
companies.
Contract drilling/construction Contract
drilling of coalbed methane gas
wells, construction of drill
sites, gas pipe lines,
reservoirs and reclamation on
locations.
Percentage of Net Revenue contributions by the two segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
------------------------------------------------
May 31, May 31, May 31,
2000 1999 1998
------- ------- -------
Minerals 3% 3% 11%
Commercial Operations 13% 14% 19%
Contract drilling/construction* 66% -- --
Other 18% 83% 70%
* From CBM contract services, see below.
Commercial operations during fiscal 2000 resulted in revenues of $340,900
as compared to revenues of $607,400 during fiscal 1999. The decrease in fiscal
2000 was as a result of no equipment being rented to the GMMV during fiscal
2000. Contract drilling and construction operations in the coalbed methane
business resulted in revenues of $1,735,800 during fiscal 2000. No revenues were
recognized in this segment during fiscal 1999.
(c) Narrative description of business by industry segment
(including Item 2 - Properties disclosure).
Minerals
Coalbed Methane
General. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming on
November 1, 1999 as a subsidiary of USE (owning 41%) and the Registrant (41%).
Separately, through USECC, the Registrant
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offers independent drilling and completion services to owners of CBM properties
in the Rocky Mountain area (principally Wyoming and Montana).
Methane is the primary commercial component of natural gas produced from
conventional gas wells. Methane also exists in its natural state in coal seams.
Natural gas produced from conventional wells also contains, in varying amounts,
other hydrocarbons, which generally require the natural gas to be processed.
However, the methane gas produced from coalbeds generally contains only methane
and is pipeline-quality gas after simple water dehydration.
CBM production is similar to conventional natural gas production in terms
of the physical producing facilities. However, the subsurface mechanisms that
allow the gas to move to the wellbore are very different. Conventional natural
gas wells require a porous and permeable reservoir, hydrocarbon migration and a
natural structural or stratigraphic trap. Coalbed methane gas is trapped
(adsorbed) in the coal itself and in the water contained in the pore space,
until released by pressure changes when the water contained in the coalbed is
removed. In contrast to conventional gas wells, new coalbed methane wells
initially produce water for several months; then, as the water production
decreases, the containing water pressure on the gas in the coal drops, and
methane gas production increases.
Methane is a common component of coal since methane is created as part of
the coalification process. Coals vary in their methane content as measured by
standard cubic feet per ton. Whether a coalbed will produce commercial
quantities of methane gas depends on the coal quality, its content of natural
gas per ton of coal, the thickness of the coalbeds, the reservoir pressure, the
existence of natural fractures and the permeability of the coal.
Due to the shallow coal seams in the Powder River Basin, the drilling,
discovery, development and production of CBM has significant economic advantages
compared with conventional gas targets. Over the past several years, CBM has
become an important source of pipeline quality gas in the United States. Methane
gas production from coalbed reservoirs has grown from virtually nothing a decade
ago to more than five percent of the total United States gas production today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana is the fastest growing CBM play in the United States.
The principal coals in the Powder River Basin include the thick coal seams
of the Tongue River member of the Paleocene Fort Union Formation, which are
among the thickest in the world. Individual coalbeds range in thickness from a
few feet up to 250 feet. A typical well might penetrate multiple coal zones over
a 200 to 1,200 foot range. Based on reports filed by other companies with the
State of Wyoming, reserves per CBM well can vary considerably but a typical
estimate can exceed 300 million cubic feet (MMcf) of gas per well. Given the
expected low drilling and completion costs, these levels of reserves have made
CBM wells attractive to gas companies and resulted in a significant amount of
exploration and production activity in the Powder River Basin.
To date, RMG has drilled, deepened and/or tested 3 wells on the Quantum
property to depths of 1,044 ft., 1,103 ft. and 1,503 ft. In two of the wells,
testing of four zones indicated potential for gas. Further drilling on the
Quantum property for coalbed methane has been curtailed by the temporary
moratorium imposed by the Montana Oil and Gas Commission.
CBM Contract Services. USECC owns 10 truck mounted drilling rigs (drilling
capacity generally down to 1,500 feet, with one rig to 2,500 feet) and related
equipment with which it provides services to third parties who own and develop
CBM properties in the Powder River Basin in Wyoming and Montana. These services
include site preparation, drilling, casing, completion, dam construction,
compressor and gathering pipeline construction and site reclamation.
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For fiscal 2000, USECC had completed or was performing at May 31, 2000,
contract services for approximately 12 companies active in the CBM sector.
During this period, USECC worked on over 300 CBM wells (including infrastructure
projects involving CBM wells). USECC spent approximately $1,557,800, one half of
which is the obligation of the Company, to buy additional equipment and
materials for the contract services business in fiscal 2000. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The contracts are negotiated on a turnkey or time and materials
basis, depending on the project and the customer's needs. USECC contracts with
the operator of the wells; USECC does not act as the operator on any of the
services wells or projects. The largest customer in fiscal 2000 was J.M. Huber,
Inc., representing $2,603,100 (33%) of the Company's gross revenues and 49% of
the Registrant's net revenues from all contract drilling and construction
segment operations.
Due to the expected continued growth in the CBM play in Wyoming and
Montana, it is expected that the amount of business done by USECC's contract
services business in fiscal 2000 could continue at the same or improved levels
in fiscal 2001, if RMG and Quantum start developing substantial numbers of CBM
wells on their acreage position. See below.
Rocky Mountain Gas, Inc. RMG was formed by USE and Crested as an
independent energy company to engage in the acquisition, exploration,
development, production and exploitation of CBM, for its own account. It is
expected that USECC will provide support services in CBM property development by
RMG for RMG's own account, and may also provide competitive services to develop
wells on acreage held by RMG and Quantum (see below). Compression of the coalbed
methane gas in order for it to be fed into a pipeline and pipeline construction,
is presently planned to be contracted out to others seeking to buy gas
production.
CBM wells in the Powder River Basin are generally 300 to 1200 feet deep,
typically take three to ten days to drill and complete and cost between $30,000
- - $120,000 per well. In comparison to conventional oil and gas wells, Powder
River Basin coalbed methane wells can generally be characterized by their low
cost and short drilling time frame. RMG intends to continue acquiring CBM
acreage. While the costs to acquire leasehold interests in the Powder River
Basin have increased, RMG believes that attractive lease acquisition
opportunities are still available.
In fiscal 2000, RMG acquired from Quantum Energy LLC an undivided 50%
working interest (WI) and 40% net revenue interest (NRI) in approximately
185,000 net mineral acres of coalbed methane leases located in the Powder River
Basin of southeastern Montana. See "The Quantum Agreement" below. With this
acquisition, RMG became one of the larger holders of gas leases in this area.
The gas collection systems and related equipment associated with these wells may
be furnished by RMG or provided by a third party (transmission company) at a
negotiated price per thousand cubic feet (Mcf) of gas transported in the
pipeline. The produced and gathered gas would then be sold into a transmission
company's pipeline.
In addition to the acreage held with Quantum, RMG has acquired
approximately 64,000 net acres of other coalbed methane prospects in Wyoming.
See below.
RMG presently does not have any proved developed or undeveloped gas
reserves. RMG plans to drill a total of 125 coalbed methane wells in fiscal 2001
and 2002. Quantum also plans to drill an additional 100 wells in which RMG will
have a 50% working interest. Attaining these objectives will depend on when and
where on RMG's acreage in Wyoming and Montana the necessary drilling permits can
be obtained, see "CBM Permits" below. RMG and Quantum have identified over 200
drilling locations on state and fee portions of the acreage. The actual number
of wells to be drilled in fiscal 2001 and 2002 will depend on future operating
results, availability of capital, the prevailing price of methane gas, and
issuance of permits.
6
To fund startup operations and acquire acreage interests from Quantum
Energy LLC, RMG sold 1,203,333 shares of restricted common stock at $3.00 per
share to accredited investors (including USE and Yellow Stone Fuels Corp.) for
net proceeds of $3,509,000 ($100,000 was paid in offering expenses and
commissions to a registered broker-dealer for placement services on sales to
investors other than USE and Yellow Stone Fuels Corp.). These shares are in
addition to the initial shares acquired by USE and Crested and employees and
directors of the companies. The investment by USECC at $3.00 per share is in
addition to the original shares acquired by USE and Crested on the formation of
RMG. Additional capital from institutions and/or joint ventures with industry
partners is needed in fiscal 2001 and 2002 to begin fully exploiting the CBM
acreage. See Item 7.
The Quantum Agreement. RMG's largest prospects are the Castle Rock/Kirby
prospects in southeast Montana consisting of approximately 185,000 net mineral
acres jointly owned with Quantum. RMG acquired a 50% working interest (WI) and
40% net revenue interest (NRI), on these properties under an Agreement with
Quantum, which closed on January 3, 2000. RMG and Quantum are also currently
negotiating to acquire additional acres in their area of mutual interest ("AMI")
of the Powder River Basin in Montana.
The acreage held with Quantum is all in Montana, and includes 82,807 net
acres of BLM land, 14,910 net acres of state land (Montana), and 90,430 net
acres of fee land.
Under the Quantum Agreement, the ultimate purchase price is $5,500,000, of
which $3,200,000 was paid on January 3, 2000 and $1,000,000 was paid on May 1,
2000. A payment of $1,300,000 is due on or before December 31, 2000. If RMG
fails to pay the last purchase installment of $1,300,000 on or before December
31, 2000, RMG must assign 12% of its undivided 50% WI in the properties back to
Quantum. At Quantum's sole option, it may elect to have USECC drill and complete
additional wells for the equivalent cost of $1,300,000 (all paid for by RMG). If
Quantum exercises this option, RMG would own a 50% WI (40% NRI) in the wells
drilled with those funds, but only after Quantum has received $1,300,000 in net
revenues (payback) from those wells.
A separate provision in the Quantum Agreement requires RMG to spend
$2,500,000 to drill and complete 25 CBM wells, as identified and agreed to by
the operating company, Powder River Gas, LLC (see below). Quantum will have a
carried working interest in these wells, which means that RMG must pay all of
the drilling and completion costs for these wells; after production begins, the
80% net revenue interest will be split 40% to RMG and 40% to Quantum, and
operating costs will be split 50% to RMG and 50% to Quantum. RMG will not be
entitled to recover any of the drilling and completion costs for these wells.
If RMG does not spend $2,500,000 to drill and complete the 25 wells by
November 30, 2000, and Quantum spends part or all of that amount of funds to
drill and complete wells on the acreage, then RMG will have the right (until
November 30, 2001) in effect to buy back its 50% WI for an amount equal to
Quantum's expenditures, plus Quantum's cost of funds (if borrowed). Quantum will
hold 100% of the WI and the full 80% NRI until such time as RMG buys back its
50% WI in the subject wells. If RMG buys back its 50% WI, Quantum would hold a
48% NRI, and a 50% working interest in the subject wells until two years after
RMG buys back its 50% working interest. In this period of time, RMG would hold a
50% WI but only a 32% NRI from the subject wells. After two years from the buy
back date, RMG would hold a 40% net revenue interest in production from the
subject wells; RMG would maintain its 50% WI starting with its buy back date.
In addition, the Quantum Agreement calls for RMG and Quantum to drill and
complete a total of an additional 100 wells between January 1, 2000 and December
31, 2000, subject to force majeure. Each party shall pay 50% of the wells'
drilling and completion costs during the year 2000, for a 40% net revenue
interest to each party. Neither RMG nor Quantum will have a carried interest in
any of these wells. Instead,
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in the event that either Quantum or RMG elects not to drill the wells during the
year 2000, then the party who elects to drill the wells shall recover the funds
advanced by it to pay for the other party's share of costs to drill and complete
the wells, plus a 300% penalty. Until the paying party recovers its costs plus
the penalty, the paying party will hold 100% of the working interest and the
full (i.e., 80%) net revenue interest. After such recovery of advances and
penalty, the nonconsenting party will own its 50% working interest and 40% net
revenue interest. This penalty provision shall also apply to all future years
between the parties as to wells not equally participated in on the Quantum
acreage.
The RMG-Quantum properties will be operated through Powder River Gas, LLC,
a Wyoming limited liability company owned 50% by RMG and 50% by Quantum. CBM
well sites will be selected from the acreage as approved by a management
committee in which Quantum and RMG have equal representation; drilling,
completion and gathering system costs will be authorized by the committee and
funded by RMG and Quantum according to their interests in the acreage as
determined by the Agreement with Quantum. USECC has the right to provide
drilling services on the first 25 wells drilled by Powder River Gas, LLC based
on competitive drilling rates in the areas surrounding the wells to be drilled.
Thereafter, USECC will have the right to submit bids on a competitive basis to
Powder River Gas LLC for drilling contracts on additional acreage.
RMG plans to operate a majority, if not all of the Powder River Basin
properties it owns outside the Quantum acreage.
Permitting
Drilling CBM wells requires obtaining permits from various governmental
agencies. The ease of obtaining the necessary permits depends on the type of
mineral ownership and the state in which the property is located. Intermittent
delays in the permitting process can reasonably be expected throughout the
development of any play. For example, there is currently a temporary moratorium
for drilling CBM wells on fee and state lands in Montana. RMG may shift its
strategy as needed to drill in different parts of the CBM play or drill
conventional shallow natural gas wells in order to evaluate all formations,
including coal, for gas potential and expedite production capabilities. As with
all governmental permit processes, there is no assurance that permits will be
issued in a timely fashion or in a form consistent with RMG's anticipated
operations.
On March 16, 2000, the Northern Plains Resource Council, Inc. (NPRC) filed
suit against the Montana Board of Oil and Gas Conservation requesting an order
of the court compelling the defendant to prepare a Supplemental Environmental
Impact Statement (EIS) for coalbed methane development, which could further
delay development. RMG and others have filed a motion to intervene to
participate in this litigation and to ensure that drilling can be performed
during any environmental analysis. The matter is pending.
The Wyodak Environmental Impact Statement (EIS) for the Powder River Basin
in Wyoming was issued in the fall of 1999, which allowed the permitting of 5,000
CBM wells to be drilled on Federal lands in Wyoming. More CBM well applications
have been submitted causing the BLM to begin a second EIS for the Powder River
Basin Area in Wyoming that will include CBM and conventional oil and gas wells.
This new EIS is scheduled to commence in early summer 2000 and continue for 20
to 24 months. Development on Federal lands in Wyoming has been stopped with the
balance of the Wyodak EIS permitted wells (4,000) occurring on fee and state
lands. BLM has started an EA reviewing drainage issues which could allow an
additional 1,500 new CBM well permits in the same region. This was scheduled for
scoping in early April 2000 with completion expected the following October.
Again, there is no assurance that the EA and EIS will not negatively impact
RMG's business or operations.
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In addition, the Wyoming and Montana Departments of Environmental Quality
have regulations applying to the surface disposal of water produced from CBM
drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If RMG is unable to obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs to dispose produced water will
likely increase. These costs could have a material effect on operations in this
area, including potentially rendering future production and development in the
affected areas uneconomic.
In Montana, RMG has pending applications to the BLM for approximately 60
permits to drill into shallow gas sand formations on Federal land held with
Quantum, which permits are expected to be issued in September 2000, and which
may be converted to production status upon receiving approval from the Montana
Board of Oil and Gas. These wells would evaluate potential CBM production as
well as conventional gas. Regarding other land held with Quantum in Montana, the
State of Montana may lift its moratorium for CBM wells on private and state
ground in Montana, and start issuing new permits on these lands in October 2000
(a voluntary moratorium is currently in place for wells on private and state
ground in Montana). RMG has not determined to what extent it will participate in
this procedure, and is evaluating how best to protect its position to have
reasonable exploration for CBM wells proceed on state and fee ground.
As approximately 40% of RMG's acreage in the Castle Rock prospect in
Montana (held with Quantum) is on Federal land, RMG expects to have ample
acreage permitted by the BLM by late calendar 2000 to begin drilling and
evaluating gas potential in both shallow sands and coal formations. These
favorable outcomes are predicted but not assured.
Gathering and Transmission of CBM Gas
Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. RMG intends to outsource its
compression and gathering needs as well, possibly on a competitive basis with
transmission companies in the immediate area. Negotiations with various
transmission companies have been initiated by RMG in order to better manage
future capital investment, but no contracts have been signed to date.
Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, or MMcf, of daily gas capacity as set forth below:
Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline, commenced
operations September 1, 1999, with an initial capacity of 450 MMcf per day;
Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day; and
Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline, that
connects to the northern terminus of the Fort Union pipeline, is continuing to
be expanded in length and has an initial capacity of 256 MMcf per day which can
readily be upgraded to 500 MMcf per day with the addition of booster
compression. Further, on June 19, 2000, Big Horn Gas Gathering announced the
extension of its
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pipeline to serve producers in the Sheridan area. This 50+ mile extension will
place a 20" high pressure pipeline within 5 miles of the Montana border and
within close proximity to the development planned by RMG and Quantum in their
Kirby Prospect area.
Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.
Powder River Basin Properties. As of June 1, 2000, RMG owns a 50% working
interest in oil and gas leases covering approximately 185,000 net acres in the
Powder River Basin of Montana. These leases generally have two to ten year
primary terms. The federal leases are generally ten year term leases and newly
acquired fee and state leases are generally two to five year term leases. There
are five separate project areas as follows:
1. Castle Rock. This property consists of approximately 125,000 net
acres of leases held jointly with Quantum located in Powder River County, west
of Broadus, Montana. Additional properties in this area are under negotiation.
The Castle Rock prospect covers a large area and there are four separate
prospective areas: Otter Creek, Kirby, Bartholemew and Castle Rock areas.
Coals present in the Castle Rock prospect are in the Tongue River Member of
the Fort Union Formation. Coalbed methane production in the Wyoming portion of
the Powder River Basin is also from the Tongue River Member coals. Coals of
primary interest are the Sawyer, Knobloch and Flowers-Goodale coals. Other coals
present in the prospect area include the Pawnee, Brewster Arnold, Terret and
Stag coals. Gas shows from the Sawyer, Knobloch, and Flowers-Goodale coals have
been noted in several shallow water wells drilled in the area. The apparent
character, quality and gassiness of RMG project coals in the Castle Rock project
appear comparable to the coals in CBM projects by other operators located near
the Montana/Wyoming border area in Johnson and Campbell Counties, Wyoming.
An initial permitting and drilling program in this area began in late 1999
and, to date, three holes have been completed. Coals encountered in the first
drill test are outlined in the following table:
COAL DEPTH THICKNESS
---- ----- ---------
Pawnee 245 feet 26 feet
Brewster 348 feet 20 feet
Sawyer 565 feet 22 feet
Knobloch 640 feet 20 feet
Flowers-Goodale 850 feet 26 feet
Misc other coals various 16 feet
--------
TOTAL COAL 130 feet
2. Kirby: This lease block contains approximately 60,000 net acres held
jointly with Quantum located in Big Horn and Rosebud Counties, Montana, north of
Sheridan, Wyoming. Additional property in the area is being considered for
acquisition.
The prospect is located in the northwestern portion of the Powder River
Basin. Coalbed methane production has been established south of the prospect at
another field which is currently being developed by Redstone Gas Partners.
Redstone recently received Discharge Permits from the Montana DEQ to discharge
up to 1,650 gallons per minute into the Tongue River. Redstone has production
with 150 active locations
10
in the field at this time. Pennaco Energy is planning to drill several wells on
a prospect east of the field. PETCO is reportedly planning a 20 well test
project offsetting project acreage.
Several coal seams are present in the prospect area with total coal
thickness of approximately 100 feet. The thickest coal is the Wall coal which is
50-85 feet thick. Drilling depth to the Wall coal is about 500 feet and drilling
to 1000-1400 feet will test all coal sections.
Coals present at Kirby prospect are in the Tongue River member of the
Tertiary Fort Union Formation. Productive coals in the Wyoming portion of the
Powder River Basin in the CX field are also Fort Union Formation coals.
Potentially productive coals at Kirby prospect include the Canyon, Wall,
Carlson, Poker Jim-Pawnee, Brewster-Arnold, King-Sawyer, and Flowers-Goodale
coals. The Wall coal is the thickest coal in the prospect area with 50-60 feet
of development throughout the area. The Wall coal splits and thins south and
east of the prospect area. Drilling depth to the Wall coal is about 500 feet
over most of the prospect. The Wall coal outcrops along the Kirby on the east
margin of the prospect and along Rosebud Creek on the northwest portion of the
prospect.
At present there has been no gas content analysis of the Wall coal in the
immediate vicinity. However, at a recent spacing hearing before the Montana Oil
and Gas Commission for wells located in T9S R42E, Pennaco Energy presented an
exhibit with estimated gas content for various coals. Pennaco's estimate for the
Wall coal is 118 ft3/ton.
The coal intervals below the Wall coal range in thickness from 5 feet or
less to around 20 feet. The King-Sawyer coal and Flowers-Goodale are each 10-15
feet thick throughout the prospect area. Both of these coal zones have produced
some gas from shallow water wells located east of the prospect area. Total
combined coal thickness over the area is around 100 feet.
The Kirby prospect is located in a developing portion of the Powder River
Basin. Production and sales of coalbed methane have been established south of
the prospect. Gas market and pipeline access are closely established in the
area. Thick and multiple coals are present in the prospect area. Production from
the area may be enhanced by the structural features present over the prospect.
Successful completion of multiple coal zones in wells will greatly add to the
potential reserves of the area. CMS's Big Horn Gas Gathering is extending a new
20" gathering system to the Montana border near Decker, Montana.
3. Gillette North. RMG holds a 100% working interest in 80 acres of leases
in this project area located in Campbell County, Wyoming. This State lease lies
at the north end of the City of Gillette. Potential exists for one billion cubic
feet of gas on this 80 acres alone. Existing coalbed methane wells lay in the
section immediately north. Permitting of 2 wells has begun on RMG's property.
RMG intends to conduct test drilling and production techniques in this area that
lies in the heart of the current coalbed methane play in the Gillette area.
4. Finley. RMG holds 160 acres of leases in this project area located in
Converse County, Wyoming. This prospect is a State lease 12 miles east of
Edgerton, Wyoming. Review for a two well test is underway.
5. Sussex. RMG holds 640 acres of leases in this project area located in
Johnson County, Wyoming. This State lease lies 3 miles south of Sussex, Wyoming.
RMG has a 100% working interest.
Other Properties
RMG has also acquired two properties in Wyoming.
11
6. Baggs North. This prospect contains 120 acres of leases located in
Carbon County, Wyoming. This State lease is located 7 miles north of Baggs,
Wyoming. RMG has a 100% working interest in this prospect.
7. Oyster Ridge. Oyster Ridge is located in southwestern Wyoming in the
Ham's Fork Coal Field. It is midway between Evanston and Kemmerer, Wyoming and
lies in the counties of Uinta and Lincoln. Wyoming Highway 189 provides
excellent access into the area. Total property held by RMG at Oyster Ridge is
approximately 63,000 net mineral acres. RMG holds a 100% working interest and a
net revenue interest of 81.5% to 83.5%. Surface and mineral ownership is
approximately 60% Union Pacific Resources (UPR), 35% BLM, 5% state of Wyoming.
Union Pacific Resources retains the right to back into each years exploration
program for a 25% working interest. The coal formations of interest on this
project are the Cretaceous Frontier and Adaville. Both formations trend roughly
north-south through the project area. The Frontier Formation (early Late
Cretaceous) outcrops on the east side and dips westerly at 15(degree) to
30(degree). The Frontier coals are higher rank but much thinner than the
Adaville. The Adaville Formation (Late Cretaceous) outcrops on portions of the
west side of the property. Dips here are also 15(degree) to 30(degree).
Cumulative coal thickness in the Adaville is up to 100 feet in most areas.
Frontier cumulative coal thickness varies from 10 to 20 feet.
Uranium
General
Crested and USE have interests in several uranium-bearing properties in
Wyoming and Utah and in uranium processing mills in Sweetwater County, Wyoming
(the "Sweetwater Mill") and in southeastern Garfield County, Utah (the
"Shootaring Mill"). All the uranium-bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. Subject to
uranium oxide market prices improving and raising needed capital, Crested and
USE plan to develop and operate these properties (directly or through a
subsidiary company or a joint venture) to produce uranium concentrates ("U3O8")
for sale to public utilities that operate nuclear powered electricity generating
plants. In addition, other uranium-bearing properties in New Mexico and Wyoming
are held by Yellow Stone Fuels Corp. (a minority subsidiary of USE and Crested).
However, until uranium oxide prices improve significantly, all of the
uranium properties are in care and maintenance mode, meaning that work is
performed to keep the assets in stand down mode and ready for later activation
and permitting work is done as needed (mostly monitoring and reporting) to keep
existing permits in effect. As of September 12, 2000, the Company and USE sold
their interest in the GMMV properties to Kennecott.
Green Mountain
521 unpatented lode mining claims (the "Green Mountain Claims") on Green
Mountain in Fremont County, Wyoming, including 105 claims on which the Round
Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), now owned 100% by Kennecott
Uranium Company ("KUC" or "Kennecott"), a subsidiary of Kennecott Energy and
Coal Company of Gillette, WY. Kennecott Energy and Coal Company and Kennecott
Corporation of Salt Lake City, UT are subsidiaries of Rio Tinto plc, formerly
RTZ plc of London. Until September 11, 2000, the Company and USE owned a 50%
interest in the GMMV, but sold their interest to Kennecott.
12
Sheep Mountain
Unpatented lode mining claims, underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming and are adjacent to and west of the GMMV mining claims. From
December 21, 1988 to June 1, 1998, these assets were held by Sheep Mountain
Partners ("SMP"), a Colorado general partnership. On June 1, 1998, USECC
received back from SMP all of the Sheep Mountain mineral properties and
equipment, in partial settlement of disputes with Nukem and CRIC. See Item 3,
"Legal Proceedings." The Sheep Mountain Mines 1 and 2 are accessible by county
and private roads and were first operated by Western Nuclear, Inc., a subsidiary
of Phelps Dodge Corporation, in the late 1970s.
Yellow Stone Fuels Corp.
Yellow Stone Fuels Corp. ("YSFC"), was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc. YSFC
and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are herein collectively
referred to as YSFC.
In order to concentrate the efforts of USECC on conventional uranium mining
using the Shootaring Canyon and Sweetwater Mills, USECC decided to take a
minority position in YSFC and not be directly involved in properties believed
suitable for the production of uranium through the in-situ leach ("ISL") mining
process. USECC will have the right of first refusal with respect to any uranium
ore bodies YSFC discovers which are amenable to conventional mining and milling
and YSFC will have the right of first refusal with respect to ore bodies
discovered by USECC amenable to the ISL process. In the ISL process, groundwater
fortified with oxidizing agents is pumped to the ore body, causing the uranium
contained in the ore to dissolve. The resulting solution is pumped to the
surface where it is further processed to uranium oxide which is shipped to
conversion facilities for eventual sale. Generally, the ISL process is more cost
effective and environmentally benign compared to conventional mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine and mill.
The property interests of USE and Crested in Utah through Plateau Resources
Ltd. ("Plateau"):
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.
The Tony M Mine and the Frank M properties, underground uranium deposits in
San Juan County, Utah are located partially on Utah State mining leases. These
properties are accessible by county roads.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in the
Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed and
permitted by its prior owner and is located
13
approximately 178 miles by road from the Shootaring Mill. The Woods Complex was
formerly an operating uranium mine with a remaining undeveloped resource. Access
to this resource would be by extending a drift approximately 2,500 feet from the
former Wood Mine. The Wood Mine property is not permitted, but USE and Crested
do not expect difficulty in obtaining a new permit because the surface
facilities would occupy the site that has been disturbed from previous
operations.
The Green Mountain Mining Venture ("GMMV") Project
GMMV. In fiscal 1991, USE and USECC entered into an agreement to sell
50 percent of their interests in the Green Mountain. Claims, and certain other
rights, to Kennecott for $15,000,000 (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time, USE and USECC ("USE Parties") and Kennecott formed
the GMMV to develop, mine and mill uranium ore from the Green Mountain Claims,
and market U3O8. For detailed explanation of the GMMV agreement, please see
Crested Corp.'s 1999 Annual Report on Form 10-K at pages 6 and 7 and footnote F
to the financial statements.
In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV. The
Registrant, USECC, and USE counterclaimed for damages. This lawsuit was settled
on September 11, 2000. Kennecott and USE have agreed to ask the court to dismiss
all parties' claims in this lawsuit. Under the settlement agreement, Kennecott
has paid the Company and USE $250,000 and will pay the Company $1,375,000 five
days after closing and another $1,625,000 in January 2001, to acquire all of the
Company and USE's interest in the GMMV, its properties and the Sweetwater
Uranium Mill (with certain exemptions). Kennecott also has assumed all
reclamation and other liabilities associated with the GMMV, its properties, the
Sweetwater Mill and all liabilities associated with the GMMV since its
inception, including the historical liabilities associated with the Sweetwater
Mill prior to its acquisition by the GMMV. The Company and USE together retained
a 4% net profits royalty interest in any future uranium oxide produced from the
GMMV mining claims through the Sweetwater Mill (currently in a stand by mode and
not operational).
The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott, nor will the cleanup liabilities associated therewith
be assumed by Kennecott. However, the Company, USE and Kennecott have agreed to
cooperate in the disposal of the facility into the Sweetwater Mill's disposal
and impoundment areas.
Also, certain items of mining equipment held by the GMMV have been conveyed
to USE, and will be removed from the GMMV properties in 2001.
At such time as Kennecott has completed necessary reclamation work on the
Green Mountain unpatented lode mining claims (including the Round Park uranium
deposit proposed to be mined through the Jackpot Mine), Kennecott will quit
claim all of such mining claims to the Company and USE as well as certain
equipment currently being used at the mine (including a compressor and standby
generator). Kennecott will keep the Sweetwater Mill.
For information on the Green Mountain claims, see below.
Properties and Mine Plan.
The Green Mountain claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two
14
buildings (38,000 square feet and 8,000 square feet) formerly used by Pathfinder
Mines Corporation ("PMC") in mining operations. Also included are three
ore-hauling vehicles, each having a 100-ton capacity.
The Round Park (Jackpot) mining claims formerly owned solely by USE,
contain deposits of uranium which have been estimated to contain 52,000,000
pounds of U3O8; the grade averages 4.6 pounds of U3O8 per ton of mineralized
material. The GMMV had planned to mine this mineralized material from two
decline tunnels (-17 percent slope) in the Jackpot Mine driven underground from
the south side of Green Mountain. The first of several mineralized horizons in
the Round Park deposits, is about 2,300 feet vertically down from the surface of
Green Mountain. This work was halted in July, 1998.
Sweetwater Mill. In fiscal 1993, the GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations.
The Sweetwater Mill was designed as a 3,000 ton per day ("tpd") facility.
UNOCAL's subsidiary, Minerals Exploration Company, reportedly processed in
excess of 4,200 tpd for sustained periods. The Mill is one of the newest uranium
milling facilities in the United States, and has been maintained in good
condition. UNOCAL has reported that the mill buildings and equipment have
historical costs of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify UNOCAL
against certain reclamation and environmental liabilities, which indemnification
obligations are guaranteed by Kennecott Corporation (parent of Kennecott Uranium
Company). GMMV is responsible for compliance with mill decommissioning and land
reclamation laws, for which the environmental and reclamation bonding
requirements are approximately $26,084,100, which includes a $4,560,000 bond
required by the NRC. None of the GMMV future reclamation and closure costs are
reflected in the consolidated financial statements.
The reclamation and environmental liabilities assumed by the GMMV (and now
Kennecott's sole responsibility) consist of two categories: (1) cleanup of the
inactive open pit mine site near the Mill (the source of ore feedstock for the
mill when operating under UNOCAL), including water (heavy metals and other
contaminants) and tailings (heavy metals dust and other contaminants requiring
abatement and erosion control) associated with the pit; and (2) decontamination
and cleanup and disposal of the Mill building, equipment and tailings cells
after Mill decommissioning. The Wyoming DEQ exercises delegated jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation. The Sweetwater Mill is also regulated by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
Plateau's Shootaring Canyon Mill
Acquisition of Plateau Resources Limited ("Plateau"). In August 1993, USE
purchased from Consumers Power Company ("CPC"), all of the outstanding stock of
Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. Subsequent to closing, USE and Crested agreed that after
Plateau's unencumbered cash had been depleted, USE and Crested each would assume
one-half of Plateau's obligations, and share equally in Plateau's operating cash
flows, pursuant to the USECC Joint Venture. For detailed explanation of the
transaction, please see Crested Corp.'s 1998 Annual Report on Form 10-K at page
13.
15
Shootaring Mill and Facilities. The Shootaring Mill is located in
south-eastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer 1982. In 1984, Plateau put the mill on standby because of the
depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled at the mill site and approximately 172,000 tons of mineralized
material stockpiled at the Tony M Mine. Included with Mill assets are tailings
cells, laboratory facilities, equipment shop and inventory. The NRC issued a
license to Plateau authorizing production of uranium concentrates, however,
since the Mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $7,952,600 plus an
additional $1,315,100 in government securities for future bonding and license
fee requirements.
Plateau also obtained approval of a water control permit for the tailings
facility from the State of Utah Water Control Division and is awaiting the NRC's
review of the operating license conditions so Plateau can continue with the
construction of tailings facilities.
Ticaboo Townsite
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah Townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store, boat storage, rental lots, sites for
mobile homes and recreational vehicle sites and home lots and constructed homes
for sale. The Townsite is located on a State of Utah lease near Lake Powell and
is being operated as a commercial enterprise. A 1997 amendment to the Utah State
lease covering the Ticaboo townsite resulted in the State deeding portions of
the Townsite to Canyon on a sliding scale basis as parcels are sold. USE and
Crested are developing the Townsite and selling homes and mobile home sites.
Yellow Stone Fuels Corp.
YSFC has abandoned all of its unpatented mining claims and State leases
due to historically low uranium market prices.
Sheep Mountain Partners ("SMP")
SMP Partnership. In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in south-central Fremont County, Wyoming, from Western Nuclear, Inc. These
Crooks Gap mining properties are adjacent to the Green Mountain uranium
properties. SMP mined and sold uranium ore from one of the underground Sheep
Mines during fiscal 1988 and 1989. Production ceased in fiscal 1989, because
uranium could be purchased from the spot market at prices below the mining and
milling costs of SMP. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Each group provided one-half of
$315,000 to purchase equipment from Western Nuclear, Inc.; USE and Crested also
contributed their interests in three uranium supply contracts to SMP and agreed
to be responsible for property reclamation obligations.
16
The SMP Partnership agreement provided that each partner generally had a 50
percent interest in SMP net profits, and an obligation to contribute 50 percent
of funds needed for partnership programs or discharge of liabilities. Capital
needs were to have been met by loans, credit lines and contributions. Nukem is a
uranium brokerage and trading concern.
SMP was directed by a management committee, with three members appointed by
USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation. During fiscal 1991,
certain disputes arose between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. Such proceedings are still under appeal.
Properties. Until June 1, 1998, SMP owned 80 unpatented lode mining claims
on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USE/Crested and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. See Item 3. Production
from the properties is subject to sliding-scale royalties payable to Western
Nuclear, with rates ranging from one to four percent on recovered uranium
concentrates. As of the date of this report, USE and USECC owned 98 unpatented
lode mining claims and a 644 acre adjoining State Mineral Lease in the Crooks
Gap area.
There is an ion exchange plant on the properties which can be used to
remove natural soluble uranium from mine water. USE, on behalf of USECC, has
submitted a plan to the NRC to decommission this facility and obtained a three
year extension for timeliness of decommissioning. This facility may be disposed
of at the Sweetwater Impoundment Facility (see above).
Property Maintenance. Currently, USECC has a maintenance staff on site to
care for and maintain the properties.
Permits. Permits to operate existing mines on the Crooks Gap properties
have been issued by the State of Wyoming. Amendments are needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit, another piece of the SMP properties conveyed.
Uranium Market Information.
Uranium Spot Market. Uranium spot prices averaged $8.05/lb. U3O8 on August
7, 2000, a decrease of 5.9% from $8.45 at the end of May 31, 2000. During the
first half of 2000, total spot market volume was approximately 7 millions pounds
U308 compared with 14 million pounds for the first half of 1999.
Uranium Long-Term Market. The long-term market continued to be relatively
quiet in the second calendar quarter with the long-term uranium price indicator
at $9.50/lb. U3O8. Demand in the long-term market is expected to increase over
the remainder of the year as utilities move to cover future needs and volume for
the year is expected to exceed the 1999, please see the Company's 1999 Form 10-K
for more information on the uranium market.
17
Gold
Sutter Gold Mine (California)
Sutter Gold Mining Company. In fiscal 1991, USE acquired an interest in the
Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California, held by a mining joint venture known as the Sutter Gold Venture
("SGV"). The entire interest of SGV is now owned by USECC Gold LLC, a Wyoming
limited liability company, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC"). The Lincoln Project has been renamed the Sutter
Gold Mine ("SGM").
Like uranium, current gold prices are too low to allow SGMC to raise the
capital necessary to put the gold property into production. Except for limited
infrastructure improvements in 2000, the assets are in care and maintenance
mode, and the existing permits are being kept current as necessary.
In fiscal 1997, SGMC completed private financings totaling a net of
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corporation ("RAF"), and $5,843,400 through a private
placement conducted in Toronto, Ontario, Canada by C.M. Oliver & Company
Limited). The net proceeds of $6,511,200 from these financings (after deduction
of commissions and offering costs) were applied to pre-production mine
development, mill design, and property holding and acquisition cost. Additional
financing of up to $15,000,000 will be needed to fund the development and
construction of the mine/mill.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of the 1,000 ton-per-day gold mill complex
and development of the underground mine and plans are being evaluated to develop
the mine into a visitor's center to generate cash flow while the gold prices
remain depressed.
During fiscal 1998, SGMC amended its 1993 Conditional USE Permit (see
"Permits and Future Plans"), finalized the process flow of the mill, entered
into the final design engineering contract with the engineering firm of Lockwood
Greene of Dallas, Texas and built the entrance road to the mine. Once a decision
to commence production is made, from that date, it is estimated it will take
approximately 18 months to complete the mill complex construction and pour the
first bar of gold.
After completion of the two private financings, and taking into account a
restructuring of the ownership of USE and Crested in SGMC, USE and Crested own a
$10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") which was
issued to USE and Crested in connection with the restructuring of SGMC for the
Canadian private placement. The USECC Warrant is owned 88.9% by USE and 11.1% by
Crested. The USECC Warrant provides that for each ounce of gold over 300,000
ounces added to the proven and probable category of SGMC's reserves (up to a
maximum of 400,000 additional ounces), using a cut-off grade of 0.10 ounces of
gold per ton (at a minimum vein thickness of 4 feet), USE and Crested will be
entitled to cash or additional shares of Common Stock from SGMC (without paying
additional consideration) at SGMC's election. The number of additional shares
issuable for each new ounce of gold reserves will be determined by dividing
US$25 by the greater of $5.00 or the weighted average closing price of the
Common Stock for the 20 trading days before exercise of the USECC Warrant. The
USECC Warrant is exercisable semi-annually. If SGMC decides against the exercise
of the USECC Warrant, it can pay USE and Crested US$25 in cash for each new
ounce of gold (payable out of a maximum of 60% of net cash-flow from SGMC's
mining operations). Additions to reserves will be determined by an independent
geologist agreed upon by the parties.
18
USECC Management Agreement with SGMC. Effective June 1, 1996, SGMC entered
into a Management Agreement (dated as of May 22, 1996) with USE under which
USECC provides administrative staff and services to SGMC. USECC is reimbursed
for actual costs incurred, plus an extra 10% during the exploration and
development phases; 2% during the construction phase; and 2.5% during the mining
phase (such 2.5% charge to be replaced with a fixed sum which the parties will
negotiate at the end of two years starting when the mining phase begins). The
Management Agreement replaces a prior agreement by which USECC provided
administrative services to SGMC.
Properties. SGMC (through its subsidiary USECC Gold) holds approximately 14
acres of surface and mineral rights (owned), 240 acres of surface rights
(owned), 436 acres of surface rights (leased), 158 acres of mineral rights
(leased), and 380 acres of mineral rights (owned), all on patented mining claims
near Sutter Creek, Amador County, California. The properties are located in the
western Sierra Nevada Mountains at from 1,000 to 1,500 feet in elevation; year
round climate is temperate. Access is by California State Highway 16 from
Sacramento to California State Highway 49, then by paved county road
approximately .4 miles outside of Sutter Creek.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 2000 through May 31, 2001. Property taxes for fiscal 2001
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
A separate holder of four of the properties that were assembled by Meridian
into the Lincoln Project holds a 5 percent net profits interest on production
from such properties, which was granted by Meridian when it acquired the
properties. The "net profits" generally will be equal to gross mineral revenues
less an amount equal to 105 percent of numerous categories of costs and
expenses. An additional 0.5 percent net smelter return royalty is held by a
consultant to a lessee prior to Meridian's acquisition of the properties, which
0.5 percent interest covers the same four properties in the Lincoln Project.
Permits and Future Plans. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and improvement,
and site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group, see
"Legal Proceedings." Since SGMC already has a valid CUP, SGMC believes it may be
able to move forward on certain parts of the development of the
mine/mill/visitor center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.
Visitor's Center. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. These
19
improvements will help SGMC develop the tourist potential of Sutter Gold Mine,
pending improvements in the price of gold. Demographics indicate that within a
150 mile radius, there is a total market population of 19.4 million people with
9.0 million tourists visiting the area each year. The Sutter Gold Mine/Museum
attraction is located along scenic Highway 49 (known as the Gold Road) between
the historic gold mining towns of Sutter Creek and Amador City, Amador County,
California. The Amador County Chamber of Commerce estimates that 2.5 million
people drive by SGM's entrance each year. Facilities include a visitor's center
with a gift shop and museum, a self-guided tour of modern mine activities,
visitor gallery/museum, hiking trails, picnic areas and a special gold panning
area. SGMC is evaluating how the tourism business performs during fiscal 2000
and the first quarter of fiscal 2001. These evaluations may result in the
business being curtailed, shut down or sold.
Molybdenum
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, Crested is
entitled to receive annual advance royalties of 25,000 pounds of molybdenum, or
cash equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and
was renamed Cyprus Amax Minerals Company in November 1993) delineated a deposit
of molybdenum containing approximately 146,000,000 tons of mineralization
averaging 0.43% molybdenum disulfide on the properties of USE and Crested.
Cyprus Amax was acquired by Phelps Dodge Corporation in 1999.
Advance royalties are paid in equal quarterly installments, until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. See "Note F to the USE consolidated financial statements."
The advance royalty payments reduce the operating royalties (six percent of
gross production proceeds) which would otherwise be due from Cyprus Amax from
production. There is no obligation to repay the advance royalties if the
property is not placed in production.
The Agreement with AMAX also provides that Crested is to receive $1,000,000
at such time as the Mt. Emmons properties are put into production and, in the
event AMAX sells its interest in the properties, USE and Crested would receive
15 percent of the first $25,000,000 received by AMAX. USE and Crested have
asserted that the acquisition of AMAX by Cyprus Minerals Company and later by
Phelps Dodge was a sale of AMAX's interest in the properties which would entitle
USE and Crested to such payment. Cyprus Amax rejected such assertion. Since
Phelps Dodge Corporation acquired Cyprus Amax, USE and Crested have initiated
discussions concerning the properties and the positions of the parties regarding
the royalties and other issues.
Molybdenum Market Information
Molybdenum is a metallic element with applications in both metallurgy and
chemistry. Principal consumers include the steel industry, which uses molybdenum
alloying agents to enhance strength and other characteristics of its products,
and the chemical, super-alloy and electronics industries, which purchase
molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus forming Cyprus AMAX. Thereafter, Phelps Dodge
20
acquired of Cyprus Amax. This further concentrated these companies' copper
production capabilities and added molybdenum reserves to the surviving company
Phelps Dodge.
Parador Mining (Nevada)
USE and Crested are sublessees and assignees from Parador Mining Co., Inc.
("Parador"), of certain rights under two patented mining claims located in the
Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador are presently in litigation concerning this
property. See Item 3, "Legal Proceedings - BGBI Litigation."
Oil and Gas.
Fort Peck Lustre Field (Montana). USECC conducts a small oil production
operation at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana. Until December 1998, four wells were producing, but were
shut in pending an increase in oil prices. Recently, 3 of the wells were again
placed in production. USECC receives a fee based on oil produced. USE is the
operator of record. No further drilling is expected in this field. This fee and
certain real property of USE and Crested, have been pledged or mortgaged as
security for a $1,000,000 line of credit from a bank.
Real Estate and Other Commercial Operations
Crested owns varying interests, alone and with USE, in affiliated companies
engaged in real estate, transportation, and commercial businesses. The
affiliated organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads, Inc. (through Plateau). Activities of these and other subsidiaries
in the business sectors include ownership and management of a commercial office
building, the townsite of Jeffrey City, Wyoming and the townsite, motel,
convenience store and other commercial facilities in Ticaboo, Utah.
Wyoming Properties. USECC owns a 14-acre tract in Riverton, Wyoming, with a
two-story 30,400 square foot office building (including underground parking).
The first floor is rented to affiliates, nonaffiliates and government agencies;
the second floor is occupied by USE and Crested and is adequate for their
executive offices. The property is mortgaged to the WDEQ as security for future
reclamation work on the SMP Crooks Gap uranium properties.
USECC (through WEA) also owns a fixed base aircraft operation at the
Riverton Municipal Airport, including a 10,000 square foot aircraft hangar and
7,000 square feet of associated offices and facilities. This operation is
located on land leased from the City of Riverton for a term ending December 16,
2005, with an option to renew on mutually agreeable terms for five years. The
annual rent is presently $1,180 (adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold. WEA owns and
operates an aircraft fixed base operation with fuel sales, flight instruction
services and aircraft maintenance in Riverton, Wyoming.
21
USE and Crested also own 18 semi-developed lots on 26.8 acres and 63 acres
of undeveloped land near the Riverton Municipal Airport, and three mountain
sites covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming, where about
130 people presently live. Nearly 4,000 people resided in Jeffrey City in the
early 1980s, when the nearby Crooks Gap and Big Eagle uranium mining projects
were active. USE and Crested are selling lots at Jeffrey City.
Colorado Properties. In connection with the AMAX transaction for the Mt.
Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax. Thereafter, USE (together with Crested)
signed option agreements with Pangolin Corporation, a Park City, Utah developer,
for sale of the 57 acres, and a separate parcel owned in Gunnison County,
Colorado.
Although the initial payments on the option agreements were received,
thereafter the developer defaulted in making a payment to Crested of $164,439
(principal plus interest). Also, the first note ($454,894) was not paid in
January 1998. In July 1998, USE and Crested filed a lawsuit against Contour and
associated parties to seek recovery of the balance owing on the promissory notes
and contracts. See "Item 3, Legal Proceedings."
Utah Properties. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate. Revenues from sale of homesites and operation
of the motel were nominal in 2000.
Commercial operations are not dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on USE and
Crested.
RESEARCH AND DEVELOPMENT
USE and Crested have incurred no research and development expenditures,
either on their own account or sponsored by customers, during the past three
fiscal years.
ENVIRONMENTAL
General. The operations of USE and Crested are subject to various federal,
state and local laws and regulations regarding the discharge of materials into
the environment or otherwise relating to the protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations conducted in
Wyoming, Wyoming's mine permitting statutes, Abandoned Mine Reclamation Act and
industrial development and siting laws and regulations also impact the Company.
Similar laws and regulations in California affect SGMC operations and in Utah,
will effect Plateau's operations.
USE and Crested believe they are currently in compliance in all material
respects with existing environmental regulations. To the extent that production
by SMP, GMMV, SGMC or RMG is delayed,
22
interrupted or discontinued due to need to satisfy existing or new provisions
which relate to environmental protection, future earnings of USE and Crested
could be adversely affected.
Crooks Gap. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling.
Other Environmental Costs. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. USE and Crested do
not anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the competitive
position of USE and Crested.
EMPLOYEES
Crested has no full-time employees. Payroll expense has been shared by USE
and Crested since 1981. Crested uses approximately 50 percent of the time of USE
employees, and reimburses USE accordingly. USE has approximately 86 full-time
employees as of August 26, 2000.
MINING CLAIM HOLDINGS
Title to Properties. Nearly all the uranium mining properties held by GMMV,
USE, Crested and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also annually pay certain rental fees to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and self-
maintained, they possess some unique vulnerabilities not associated with other
types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
mining claims which were valid when located could become invalid if challenged.
Disputes can also arise with adjoining property owners for encroachment or under
the doctrine of extralateral rights (see Item 3, "Legal Proceedings - BGBI
Litigation").
RMG's properties are mineral leases of BLM, state and fee lands, which
require annual cash payments totaling approximately $515,800 to keep the leases
in effect during fiscal 2001. RMG is responsible for 50% of this amount.
Proposed Federal Legislation. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements
23
for mined land reclamation and other environmental control measures. It remains
unclear whether the current Congress will pass such legislation and, if passed,
the extent such new legislation will affect existing mining claims and
operations. The effect of any revision of the General Mining Law on the
Company's operations cannot be determined conclusively until such revision is
enacted; however, such legislation could materially increase the carrying costs
of mineral properties which are located on federal unpatented mining claims, and
could increase both the capital and operating costs for such projects and impair
the Company's ability to hold or develop such properties.
ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of Colorado)
Civil No. 91 B 1153. Later, USECC filed another suit for the standby costs at
the SMP mines against SMP in the Colorado State Court. The Federal Court stayed
the arbitration proceedings and the State Court case was also stayed. In fiscal
1994, all of the parties agreed to exclusive and binding arbitration of the
disputes before the American Arbitration Association, for which the legal claims
made by both sides included fraud and misrepresentation, breach of contract,
breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
arbitration panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 finding generally in favor of USE and Crested on certain of their
claims (including the claims for reimbursement for standby maintenance expenses
and profits denied SMP in Nukem's trading of uranium), and in favor of
Nukem/CRIC and against USE and Crested on certain other claims. USE/Crested
filed a petition for confirmation of the Order and the District Court confirmed
the Order in its Second Amended Judgment (the "Judgment") on June 30, 1997.
Thereafter, Nukem/CRIC appealed the Judgment to the 10th Circuit Court of
Appeals ("10th CCA").
A three judge panel of the 10th CCA in Nos. 96-1532 ss. 97-1332 issued an
Order and Judgment in the Nukem/CRIC arbitration/litigation matter on October
22, 1998, which unanimously affirmed the Federal District Court Second Amended
Judgment without modification. The ruling of the 10th CCA affirmed (i) the
imposition of a constructive trust in favor of SMP on Nukem's rights to purchase
CIS uranium, the uranium acquired pursuant to those rights, and the profits
therefrom; and (ii) the damage award against Nukem/CRIC. As a result of the
ruling of the 10th CCA, USE and Crested received an additional $6,077,264
(including interest and court costs) from Nukem in February 1999 for a total net
monetary award of $15,468,625 in the arbitration/litigation, and equitable
relief in the form of USE's and Crested's interest in SMP, which holds the
constructive trust over the CIS contracts. Nukem/CRIC filed motions for entry of
final satisfaction of Judgment. The U.S. District Court denied both motions, the
last one on July 16, 1999 and on August 16, 1999, Nukem filed a Notice of Appeal
to the 10th CCA. USECC opposes the appeal and filed its brief in opposition to
Nukem/CRIC's appeal. The appeal is pending. For more information, see Note K to
the financial statements.
BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in certain
litigation in the District Court of the Fifth Judicial District of Nye County,
Nevada, Civil No. 11877, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30,
1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick
Corp., a large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns
24
extra-lateral rights associated with two patented mining claims owned by Parador
Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI,
which claims are in and adjacent to BGBI's Bullfrog open pit and underground
mine. USE and Crested assert certain interests in the claims under an April 1991
assignment and lease with Parador, which is subject to the lease to BGBI's
predecessor.
A partial or bifurcated trial to the Court of the extra-lateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a vein apexing on Parador's Claims. The Court found that Parador had
failed to meet its burden of proof and therefore Parador, USE and Crested have
no right, title and interest in the minerals lying beneath the claims of Layne
pursuant to extralateral rights. The partial trial did not address the issues of
breach of contract by the defendants and BGBI for specific performance and they
were tried before the Court commencing on January 26, 1998. After the trial, the
Court found against the parties on their respective claims. BGBI and Parador and
USE/Crested all appealed the decision to the Nevada Supreme Court. The appeal is
pending.
Department of Energy Litigation
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC").
The plaintiffs have asked the Court to declare that (i) the DOE violated
its statutory authority by transferring uranium to USEC in excess of statutory
limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for
fair value, as required by the Act, and mandated findings by the DOE concerning
possible adverse impacts were not supported in fact; and (iii) the DOE be
enjoined from future transfers in violation of the Act. The DOE filed a motion
to dismiss the complaint claiming that the U.S. Congress withdrew its consent to
be sued in connection with the USEC Inc. privatization and that USEC Inc. must
be joined as an indispensable party. The State of Wyoming moved to join in the
litigation on behalf of the plaintiffs. A hearing was held on the motions on
January 8, 1999 before the U.S. District Court in Cheyenne, Wyoming. The Court
took the motions under advisement and has not entered a decision.
Contour Development Litigation
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, LLC
and entities and persons associated with Contour Development Company, LLC
(together, "Contour") and the original developer Pangolin Corporation, seeking
compensatory and consequential damages of more than $1.3 million from the
defendants for dealings in real estate owned by USE and Crested in Gunnison,
Colorado. See "Business Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above and Note K to the financial statements.
Kennecott Uranium Litigation
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. and USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial approval of a plan to sell the GMMV or liquidate its assets
plus attorney fees and costs. Defendants filed a motion to change venue to the
District Court in Fremont
25
County, Wyoming and the Sixth Judicial District court granted the motion. The
case was then transferred to the Ninth Judicial District Court of Fremont
County, Wyoming in Civil Action No. 31322. The parties have initiated discovery
proceedings each seeking production of documents from the other and certain
documents of the parties have been received and reviewed.
On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC filed an
answer denying the various allegations of Kennecott and counterclaims against
plaintiff Kennecott and its parent Rio Tinto plc. Defendants also filed a
separate third party complaint against Rio Tinto plc. Kennecott filed a motion
to dismiss the complaint and Rio Tinto filed a motion for judgment on the
pleadings. A hearing date on the respective motions was set for May 30, 2000,
but was continued for a time in September or October 2000 to be set by the
Court, as the parties are attempting to negotiate a settlement. On July 14,
2000, Kennecott and USECC entered into a partial settlement wherein Kennecott
paid USECC $250,000 to settle claims peripheral to the case concerning accounts
receivables and other minor claims for work done and equipment used and
mobilized by USECC for the GMMV.
On September 11, 2000, the parties executed a settlement agreement and
related documentation and releases (the "Settlement"). Under the Settlement,
USECC will sell all of its interests in the GMMV and the GMMV properties,
including those within a described Area of Interest to an affiliate of
Kennecott. The purchase consideration is $3,250,000 in cash and a 4% net profits
royalty interest in certain of the mining claims at the Big Eagle and Jackpot
Mines. USECC is allowed to retain certain mining equipment and supplies, and has
the right to receive certain mining claims that may be abandoned by Kennecott.
Until final bond release, USECC may not compete in the Area of Interest.
Kennecott assumes the reclamation obligations (to the extent required by
applicable regulatory authority) at the GMMV properties and USECC retains
liabilities relating to its activities as a contractor to the GMMV. The
Settlement provides that Kennecott is under no obligation to develop any of the
properties or the underlying claims and may instead choose to sell the
properties and claims or to abandon the claims as they are no longer required.
USECC and Kennecott agree to dismiss the case and to release each other from
further liability. The Settlement is effective upon approval by the trial judge.
SGMC Litigation
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design of
the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by another local citizens project opposition group)
to the Amador County Board of Supervisors. In August and September 1998, the
Board of Supervisors certified the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior Court,
California (Case No. 98 CV 3298) by Concerned Citizens of Amador County as
plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the
26
amended CUP. A hearing was held on June 7, 1999 and the Court denied all claims
by the Concerned Citizens plaintiff. The mater is on appeal, see Note K to the
financial statements.
Dennis Selley et al vs. U.S. Energy Corp., Crested Corp. et al. On May 14,
1999, Dennis Selley personally and as personal representative of the Estate of
Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the
Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy
Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture,
alleging that the defendants were negligent as a landlord in renting a
doublewide trailer (converted to a bunkhouse) near Ticaboo, Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages. Hannah Selley died
in a June 1998 fire in the bunkhouse provided by USE, located about 1/2 mile
from the Ticaboo Lodge. Defendants deny negligence and assert various defenses
including plaintiffs' complaint is barred by the Workers Compensation statutory
immunity as well as the defense of an intervening clause. A pre-trial conference
was held on September 8, 2000, and the trial may commence on September 25, 2000.
See Note K to the financial statements.
Declaratory Judgment Action. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
Defendants filed a motion for summary judgment in July, 2000. See Note K to the
financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
A meeting of shareholders was held at the Company's offices at 877 N. 8th
W., Riverton, WY on Friday, December 10, 1999 commencing at 10:00 a.m. There was
not a quorum present at that time and the meeting was postponed until Thursday,
December 23, 1999 at 11:00 a.m.
The only matter for shareholder consideration was the election of five
directors including, John L. Larsen, Max T. Evans, Daniel P. Svilar, Michael D.
Zwickl and Kathleen R. Martin and they were so elected to serve until the next
annual meeting and until their successors are qualified.
Information Concerning Executive Officers Who Are Not Directors.
The following information is provided pursuant to Instruction 3, Item 401
of Reg. S-K, regarding certain of the executive officers of USE who are not also
directors.
Robert Scott Lorimer, age 49, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both of these companies since May 25, 1991,
their Treasurer since December 14, 1990, and Vice President Finance since April
1998. He serves at the will of each board of directors. There are no
understandings between Mr. Lorimer and any other person, pursuant to which he
was named as an officer, and he has no family relationship with any of the other
executive officers or directors of USE or Crested. During the past five years,
he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
27
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters.
(a) Market information.
The principal trading market for the Registrant's Common Stock, $.001 par
value, is the over-the-counter market. Prices are reported by the National
Quotation Bureau on Pink Sheets. The range of high and low bid quotations for
the Common Stock is set forth below for each quarter in the two most recently
completed fiscal years. Retail markup or markdown, or commissions, are not
reflected.
High Low
---- ---
Fiscal year ended May 31, 2000
Fourth quarter ended 5/31/00 $ .32 $ .15
Third quarter ended 2/29/00 .45 .20
Second quarter ended 11/30/99 .45 .21
First quarter ended 8/31/99 .50 .34
Fiscal year ended May 31, 1999
Fourth quarter ended 5/31/99 $0.52 $0.31
Third quarter ended 2/28/99 0.39 .218
Second quarter ended 11/30/98 0.420 .15
First quarter ended 8/31/98 0.350 .16
(b) Holders.
(b)(1) At September 1, 2000 there were approximately 1,797 stockholders of
record for Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock.
There are no contractual restrictions on Crested's present or future ability to
pay cash dividends, however, Crested intends to retain any earnings in the near
future for operations.
(d) During the year ended May 31, 2000, Crested issued 32,000 shares of its
Common Stock to its Outside Directors for services rendered.
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ITEM 6. Selected Financial Data.
May 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Current assets $ 1,478,700 $ 4,833,300 $ 4,809,300 $ 1,049,500 $ 596,200
Current liabilities 11,323,800 9,451,000 9,282,300 6,592,400 6,848,300
Working capital (9,845,100) (4,617,700) (4,473,000) (5,542,900) (6,252,100)
Total assets 7,681,300 8,630,600 10,211,400 6,285,700 8,132,500
Long-term obligations(1) 1,055,900 958,200 768,000 741,700 725,900
Shareholders' equity/(deficit) (4,742,300) (1,822,500) 117,200 (1,092,300) 521,900
(1) Includes $748,400 of accrued reclamation costs on uranium
properties for fiscal 2000 and $725,900 for each of fiscal 1999, 1998,
1997 and 1996, respectively.
For Years Ended May 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues $ 2,637,300 $ 4,416,600 $ 4,659,900 $ 1,703,500 $ 2,509,200
(Loss) income before
equity in loss of
affiliates and
income taxes (3,861,200) (291,900) 1,581,700 (862,400) (811,000)
Equity in loss of
affiliates (1,418,600) (1,659,800) (372,200) (807,900) (357,900)
----------- ----------- ----------- ----------- -----------
Net (loss) income $(5,279,800) $(1,951,700) $ 1,209,500 $(1,670,300) $(1,168,900)
=========== =========== =========== =========== ===========
Net (loss) income
per share $ (.51) $ (.19) $ .12 $ (.16) $ (.12)
============ ============ ============= =========== ============
Cash dividends per share -0- -0- -0- -0- -0-
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is Management's Discussion and Analysis of significant
factors which have affected the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements. The discussion contains forward-looking statements that involve
risks and uncertainties. Due to uncertainties in the minerals business, the
Company's actual results may differ materially from the results discussed in any
such forward-looking statements.
Overview of Business
The Company is in the business of acquiring, exploring, developing and or
selling mineral properties, including coalbed methane gas, uranium and gold. As
part of its mineral business, Company has been in the contract drilling and
construction business for third party coalbed methane companies. The Company
also owns interests in commercial properties which are in the tourism and rental
business.
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The Company and its parent U.S. Energy Corp. ("USE") entered into a
contract with Quantum Energy, L.L.C. ("Quantum") through their newly formed
subsidiary Rocky Mountain Gas, Inc. (RMG), to acquire a 50% working interest and
40% net revenue interest in approximately 185,000 acres of leases on properties
having potential for coalbed methane development in the Powder River Basin of
southeastern Montana. The Company and USE also hold additional properties in
northeastern Wyoming that are part of the Powder River Basin . These leases are
outside the boundaries of the agreement that controls the 185,000 acres in
Montana and consist of 880 acres in which the Company and USE own varying
interests. In addition to the coalbed methane properties held in the Powder
River Basin, the Company and USE hold a 100% working interest and a net revenue
interest of 81.5% to 83.5% in approximately 63,120 net mineral acres in the
Ham's Fork Coal Fields in Southwestern Wyoming. It is anticipated that the
business operations of the Company will be largely directed toward the
development of its coalbed methane properties during fiscal 2001 and well into
the future.
As in all mineral development operations, there are risks involved in the
development of coalbed methane gas fields. Some of the known risks in the
coalbed methane development and production business are; government regulations,
delays in permitting, environmental restrictions, market price for methane gas,
availability and capacity of pipe lines. The Company cannot accurately predict
what if any of these risks will have on its business in the future. The Company
and USE will continue to seek financing through either the sale of equity in RMG
or the USE or a joint venture with industry partners to fund its obligations on
the maintenance and development of these properties.
The Company and USE own, and during fiscal 2000 purchased additional,
drilling and construction equipment that was used during Fiscal 2000 on a
contract basis for non- related companies in coalbed methane development. This
work consisted of site preparation, drilling, casing, completion, dam
construction, compressor and gathering pipeline construction and site
reclamation. During August of 2000, the Company and USE determined they no
longer would perform such services on a contract basis for third parties. Part
of the drilling and construction equipment will be sold and a portion will be
retained for work that the Company and USE will do on the coalbed methane
properties in which they own an interest.
The Company has interests in uranium properties in Central Wyoming and a
cash revenue and expense sharing arrangement with USE on a uranium property in
Southern Utah. Both properties in Central Wyoming have been or are part of
partnership arrangements. In fiscal 1989 the Company and USE entered into an
agreement to sell a 50% interest in their Sheep Mountain properties to Cycle
Resources, Inc., a wholly owned subsidiary of Nukem, Inc.("Nukem"). This
partnership, Sheep Mountain Partners ("SMP"), and the assets contained in it
have been in litigation for the past nine years. During fiscal 1999, a partial
settlement agreement was reached wherein the Company and USE received all the
mineral properties and one uranium supply contract. Nukem has for a second time
appealed the decision to the 10th Circuit Court of Appeals. The appeal is
pending.
In fiscal 1990 the Company and USE entered into an agreement to sell a 50%
interest in their uranium properties to Kennecott. These properties were then
contributed to the Green Mountain Mining Venture ("GMMV"). The GMMV also
acquired additional mining properties and a uranium mill. During fiscal 2000,
Kennecott filed a civil action in against the Company and USE in Wyoming State
Court. The Company and USE responded by filing an answerer denying the
allegations of Kennecott and counterclaimed certain damages against Kennecott.
Settlement discussions to resolve the issues surrounding the GMMV have been
successful in resolving the disputes. The Company and Kennecott have agreed that
the Company will sell all of its remaining interest in the GMMV to Kennecott for
cash compensation of $3.25 million, payable at the signing of the letter of
intent, $.25 million, $1.325 million five days after the court approves the
terms of the agreement and dismisses the case and $1.675 in January 2001.
Kennecott will assume all reclamatio